Transfer of shares in amalgamation can trigger capital gains treatment when old shares are surrendered for new allotment.

In a scheme of amalgamation, the surrender of shares in the amalgamating companies in return for shares in the amalgamated company was treated as a transfer of capital assets under section 12B of the Indian Income-tax Act, 1922. The court held that the transaction was not a mere fresh issue of shares detached from the existing holdings; the shareholder parted with its pre-existing shares under the scheme, and that relinquishment amounted to a transfer for capital gains purposes. The fact that the amalgamating companies ceased to exist by operation of law did not prevent the transaction from falling within the statutory concept of transfer.

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Issues: Whether the allotment of shares in the amalgamated company, pursuant to a scheme of amalgamation, involved a transfer of the assessee's shares in the amalgamating companies within section 12B of the Indian Income-tax Act, 1922, so as to give rise to a capital loss.

Analysis: The share allotment under the amalgamation scheme was not treated as a mere fresh issue divorced from the existing holdings. The assessee parted with its shares in the amalgamating companies in favour of the amalgamated company in return for shares allotted under the scheme. Even though the amalgamating companies ceased to exist by operation of law after amalgamation, the transaction still amounted to a transfer of the assessee's capital assets for the purposes of section 12B. The court also held that the reframed question properly focused on whether there was a transfer, and not merely on the narrower label of exchange.

Conclusion: The transaction fell within section 12B and the answer was in the affirmative, in favour of the assessee and against the department.

Ratio Decidendi: In a scheme of amalgamation, where a shareholder's shares in the amalgamating companies are surrendered and shares in the amalgamated company are allotted in return, the shareholder's relinquishment amounts to a transfer of capital assets within the capital gains provision even if the amalgamating companies cease to exist by operation of law.

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